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    • Bitcoin-based Triangular Arbitrage with the Euro/U.S. Dollar As a Foreign Futures Hedge: Modeling with a Bivariate GARCH Model

    Zheng Nan,Taisei Kaizoji

    Quantitative Finance and Economics（2019）

    Int Christian Univ

    Cited 11|Views6
    Abstract
    This paper proposes a bitcoin-based triangular arbitrage, combining foreign exchanges in the bitcoin market and reverse foreign exchange spot transactions. An FX futures contract is used to reduce exposure to risk as a hedging instrument. The returns of the portfolio are jointly modeled using a bivariate DCC-GARCH model with multivariate standardized student's t disturbances due to the presence of leptokurtosis and fat tails observed. Based on the time-dependent covariance matrix, a dynamic optimal hedge ratio is formed, with a conditional correlation series as a by-product. Empirical results are obtained using Euros and U.S. dollars over the period from 21 April 2014 to 21 September 2018. Multiple rolling one-step-ahead forecasts are generated. The empirical results present bitcoin-based currency strategies dominate bitcoin trading in terms of risk management.
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    Key words
    bitcoin,bitcoin exchange rate,triangular arbitrage,optimal hedge ratio,DCC-GARCH model
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